Analysts cut E-Trade, cite valuation

Downgrades follow stock's recent 70% advance

By

NicoleMaestri

MENLO PARK, Calif. (CBS.MW) -- A day after E-Trade Group reported fourth-quarter results and raised its 2002 earnings targets, analysts weighed in on the report Tuesday, with Robertson Stephens and Raymond James downgrading shares of the online brokerage, citing valuation.

"The ratings change does not reflect any change in fundamentals; in fact, the company's fundamentals are excellent," wrote Robertson Stephens analyst Justin Hughes. "The rating change reflects the fact that the shares have appreciated by 70 percent over the last two months."

Hughes lowered his rating on the stock to "buy" from "strong buy."

"The shares have rebounded nicely over the past several months," according to Raymond James analyst Michael Vinciquerra, "At the current level, though, and given the continued weakness in the core brokerage business, we are reducing our rating to Market Perform."

After an initial pop at the open, shares of E-Trade declined 50 cents, or 4.1 percent, to $11.70.

The results

After the closing bell Monday, the online brokerage
ET, -1.06%
reported fourth-quarter net income from ongoing operations of $24.7 million, or 7 cents per share, compared with $6 million, or 2 cents a share, in the same period a year earlier.

Revenue rose to $345 million from $334 million. Analysts, on average, were expecting the company to earn 4 cents per share from ongoing operations on revenue of $329.8 million, according to Thomson Financial/First Call. Read more.

The company's efforts to diversify its revenue streams appeared to have paid off in the latest quarter

"As a results of the firm's ongoing efforts to diversify its operations and reduce its reliance on the transaction-based brokerage business, E-Trade was able to show these results despite continued weakness in its core operations," Vinciquerra said.

E-Trade also raised its earnings targets for fiscal year 2002, saying it now expects 2002 earnings per share from ongoing operations of 45 to 55 cents. It also said it's comfortable with the current consensus estimate for first-quarter earnings per share of 7 cents.

Robertson Stephen's Hughes raised his 2002 earnings target for the company to 45 cents a share from 40 cents and his price target for the shares to $15 from $13.

'Tough call'

Deutsche Banc Alex. Brown analyst Glenn Schorr raised his 2002 earnings target for E-Trade to 47 cents per share from 39 cents. He kept his "buy" rating on the shares but said it was a "tough call."

Schorr said E-Trade's higher guidance for 2002 was mainly driven by expansion at the bank and overall cost control, not by expectations of a strong trading recovery.

UBS Warburg maintained its "hold" rating on the stock and said it remained cautious on 2002.

"We believe [E-Trade] may have difficulty replacing declining revenues in a stable to rising rate environment," said UBS Warburg analyst Diane Glossman in a research note.

On the prowl

E-Trade could return to the M&A well to broaden its revenue stream, one analyst surmised, going on to forecast E-Trade's entry to the credit-card sphere. "We believe [E-Trade] is likely to pursue a joint venture or acquisition in the near term in order to gain this product offering," said UBS Warburg's Glossman.

"E-Trade has $400 million of cash at the corporate level that it can use for strategic purposes," Hughes said. "We believe E-Trade will make additional inroads in to other areas of financial services to serve its clients."

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